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4. Petitioner's Income Tax Returns
William D. Kennon, a certified public accountant in Deming,
New Mexico, prepared petitioner's Federal income tax returns for
the years in issue.
Petitioner reported losses from the motel of $6,319 in 1988,
$24,604 in 1989, and $7,036 in 1990. Those losses included
depreciation of $1,819 in 1988, $11,806 in 1989, and $9,099 in
1990. He filed his 1989 return on or after October 10, 1990, and
his 1990 return on or after October 15, 1991.
B. Respondent's Audit and Determination
The U.S. Attorney's office told Kathleen Roberts (Roberts),
respondent's revenue agent, that petitioner may have unreported
income because he was a drug trafficker. Roberts first audited
only petitioner's 1988 tax year, but later audited 1989 and 1990.
Roberts met once with petitioner and once at a different time
with his representative. Roberts asked them to produce books and
records for the years in issue, but they never did. Petitioner
first told Roberts that his records were in Mexico. Later,
petitioner told Roberts that his records had been stolen.
Roberts used the source and application of funds method to
calculate petitioner's income for the years in issue because
petitioner did not have records, petitioner engaged in illegal
drug activities, and he spent much more than he reported as
income on his tax returns. Roberts' audit of petitioner revealed
the following:
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